As the liquidation costs because Salomon was an ‘agent’

As a basic rule, companies have
their own separate legal personality. Both the common law and statues identify
that a company is legally separate from those involved.  This is the idea that a company is a legally
different person from the members and those who invest in it. It means that the
company is in association with its members rather than the members being the
company. There are however, exceptions where the courts are prepared to
overlook the separate legal personality in what’s known as ‘piercing the
corporate veil’. This essentially means to overlook the separate legal
personality and, where exceptions apply, hold members and directors liable for
the actions of a company.

A company has a separate legal
personality. Liability for actions made on behalf of the company does not lie
with the members and directors. The leading authority for this is Salomon v
Salomon and Co Ltd1.
The decision made by the Court of Appeal was overturned by the House of
Lords; a company that is incorporated is a separate person with its own
individual set of rights and liabilities. The liquidator in this case argued
that Salomon was liable for the liquidation costs because Salomon was an
‘agent’ of Salomon and Co Ltd.  The Court
of Appeal first held that Salomon was liable; they overlooked the separate
legal personality. The House of Lords meanwhile, decided that, because the company
was incorporated, it was its own personality and thus the defendant was not
liable for the insolvency costs.

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In 2013, the
case of Prest v Petrodel Resources Ltd & Others2
provided a new insight into the law of legal identity and personality. The
defendant and claimant were husband and wife going through divorce proceedings.
As a standard, divorce law outlines that assets owned by the parties must be
shared during the divorce. In this case it was the husband who owned a
substantial amount of expensive property. To avoid having to share this property,
the defendant set up several companies and transferred his properties to those
companies. Under divorce law, the defendant had no assets, they were owned by
the company, thus did not have to share any with the claimant. Broadly
speaking, this makes sense. The company is its own legal personality and
therefore owns the properties, not the defendant. However, the supreme court
viewed this as a matter of company law also. The decision to be made was
whether or not it was appropriate to pierce the corporate veil with regards to
the assets. Whether the properties owned by the companies should be transferred
to the claimant. Out of this, Lord Sumption developed two principles; that of
evasion and of concealment. The important difference between the two is that
concealment is legal whereas evasion is not.

Concealment is
the act ‘in which a human being is seeking to conceal their involvement in the
assets held by the company’3.  The case example of this is Salomon4.
The defendant created the company in order to move himself away from any
liability and pay out he may have to make if the company went bust. As it
happens the company did go bust and because Mr Salomon had created a company
with a separate legal personality, he was not liable. Cases regarding concealment
are difficult to decide as it is hard to know where the line stands.

On the other
hand, cases of evasion, are more significant to the veil. This occurs when the
defendant is trying to evade a legal liability such as the one in Jones vs
Lipman5.
By giving the land to a company, the defendant was trying to avoid the order of
specific performance thus leading to an evasion of legal liability. Prest6
itself is also an authority to evasion. By transferring assets to
companies, Mr Prest was evading the legal liabilities held under divorce law.
In the leading judgment, Lord Sumption held that ‘the corporate veil may be
pierced only to prevent the abuse of corporate legal personality’7.
One would argue that in suggesting this he created an overarching rule for when
the veil can be overlooked.

Before the
decision in 2013, but still applicable today, the courts followed traditional 2
exceptions to the ratio in Salomon8.
The first was agencies. This occurs when there is a relationship between an
agent and a company whereby the agent has the authority to create legal bonds.
For example, the contracts of sale, between a third party and the company.
Usually this exception is based around 2 ideas. Firstly, when the company is an
agent of a parent company and secondly, when a company is an agent of one of
its members. In Smith, Stone & Knight Ltd v Birmingham Corp9
it was the former that applied; the parent company was allowed damages with
regards to business carried about by an agency (daughter company) because the
actions were on behalf of the parent company.

The second
traditional exception is mere façade. This applies when the company in question
is a sham or a cover-up for the actions of the member(s). Members typically
create sham companies to avoid restrictions imposed by law and the rights of
claims from third parties. In Salomon10,
it was argued in the Court of Appeal that this was the case. The claimant
suggested that the defendants company was set up so that he could avoid paying
out for the debt that he had incurred. The court of appeal agreed that the
company was indeed a sham and that Salomon was liable for the debt
because he was acting as an agent. As mentioned previously, this
decision was overturned and the House of Lords held that because the company was
duly incorporated it did have its own separate legal personality. Another case
example is Jones v Lipman11.
The defendant set up a company to avoid an order of specific performance
regarding a piece of land. The land was transferred to the company and because
this was only reason for the company, it was decided by Russel Judge that the
company was a sham and the defendant should be held liable.

With regards to
whether an overarching rule has emerged, the law is still very unclear with
more than one approach as to when the veil can be pierced. It can be said that
the guidelines set out in Prest12
do provide a structure to the current law. Lord Sumption’s division into
concealment and evasion have meant that there are two leading authorities to
follow. One outlines when the veil can be pierced and the other when it cannot.
This does not mean however that there is one single overarching rule. The
exceptions of agencies and façade still stand alongside evasion and concealment
meaning that there are 4 different methods of viewing any individual case. Salomon13
still provides the good authority as to when it can be pierced but even
this is too broad to be described as an overarching rule. It was not set out in
the judgment the line between concealment and evasion, nor does it outline when
the veil cannot be pierced. Prest14
deals with the latter but with regards to the former it must still be
decided on a case by case basis. Prest15
and Salomon16
are similar in the fact that both defendant’s transfers items to companies
in order to avoid something; Salomon17
avoided liability for insolvency and Prest18
avoided liability for his assets. 
Why was it therefore decided that one of these was legal and the other
was not? Both were avoiding losing monies so why was one legal and not the
other.

With respect as
to whether the law in now more developed or limited, it must be said that both
is the case. The law has developed in the sense that we now have new authority
to base cases upon and a more structured approach as to when and under what
circumstances the veil can be pierced. In developing though, the law has also
become more limited.  New cases means
more structure and more structure means that the law is far less broad than it
was. Prior to Prest19
we only had one authority that would only advise when the veil cannot be
pierced. Prest20
provided explanation as to when the veil can also be pierced thus limiting
the claim pool. In conclusion, I think the law has both developed and limited
the idea of piercing the corporate veil but than an overarching rule has not
yet emerged.

 

 

 

 

 

The company the
group wish to set up will be a public limited company (PLC) rather than a
limited company (Ltd). It is important to distinguish between the two before
determining the roles of parties and the company’s constitution. Both PLCs and
LTD’s are governed by the Companies Act21.
This outlines everything to do with how a company should run and be formed and
more importantly what is legal and what is not. The main difference between a
public and a limited company is shares. Both types can raise capital though
shares but only a public company can trade shares on the stock markets. This
can have both positive and negative effects. The use of the stock market means
that anyone and everyone can buy shares in your company. This makes it quick
and easy to raise capital to be used by the company. However, it also means
that the documentation and details of the company are shared publically.
Limited companies on the other hand, cannot use the stock market, instead
directors usually offer out shares to people they trust and know and raise
capital this way. This can be beneficial because you could share it amongst
wealthy investors and gain substantial capital. It also keeps the company more
private as documentation doesn’t have to be shared but it means that shares are
not traded and aside from the initial capital, your friends who are now members
may not wish to invest any more. It is important to note that a shareholder and
a member are the same thing. With regards to the clients, a PLC would mean that
they could raise a lot of capital very quickly and not have to rely on the 1.1
million they have.

With regards to
roles within the company, there are three main positions to discuss. Firstly,
the shareholders. Holding a share in the company provides you with rights in
the company as well as access to the profits made on that’s share; dividends. ‘The subscribers of a company’s memorandum
of association are deemed to have agreed to become members of the company and on
its registration become members and must be entered as such in its register of
members’22.
As a shareholder, you are only liable for your first initial payment, no more.
Bradley, Laura and Jason have all put forward money to invest in this project.
With regards to them wanting to invest no more than what they have already put
forward, they don’t have to. For example, Bradley is liable to pay in the one
million pounds into the company but after that no more from him is required.
The same is applicable to Laura and Jason. As shareholders, they also have the
ability to elect a director of the company or a board of directors. However,
because this is a limited company, all those who may have bought shares in the
stock markets will also get a vote.

The director themselves then also acquires
duties under the Companies Act. A director is any person occupying the position
of director no matter what their title23. As
director, there are 7 duties they must adhere to. They must act within their
powers only, promote success of the company, have an independent judgement,
perform their role with reasonable care, skill and diligence, avoid conflicts
of interest, not to accept benefits from any third parties and finally, to
declare an interest in proposed transactions. It is impossible to advise who
might be the director because it is up to the shareholders as mentioned
previously.

With regards to the constitution, a company
must have articles of association24.
Section 17 of the Act25
describes a constitution as including the articles and any resolution or
agreement affecting the constitution. It is usually recommended that members
enter a separate shareholders agreement that differs from the company’s
constitution. Previously, Table A has set out provisions/articles that companies
can use in their constitution. For modern companies however, the Company’s Act
200626 says
that a company can chose to use all or any of the provisions of the model
article or to create its own bespoke articles. In this situation, I would
advise following the model article. Following these articles makes them
binding; Companies Act 2006, s33(1). An article they may wish to add in, either
to the constitution or the shareholders agreement is with reference to majority
shareholders. Currently Bradly has the biggest share or owns the most. Out of
11, he would own 10. This would give him the right to appoint directors and
make decisions on the company’s behalf because he controls more than 75% of the
shares. With this in mind, for Jason, Laura and Lizzie to be able to have any
input, they must decide a way of limiting Bradleys powers but not reducing the
effect of shares. It would not be possible to suggest that one share has the
same power as 11 because then nobody would buy more than one share in the
company and raising capital would fail.

A minority shareholder is someone who owns
less than half the company’s total shares. In this scenario, Laura and Jason
would automatically become minority shareholders because they own less than
half. A claim against the company is available when the company has or is being
managed in such a way that is unfairly prejudice to the minority shareholders.
If this is the case there are 3 types of claim. The first is an unfair
prejudice petition27. This
is available when the affairs of the company have been or are being managed in
a way that is unfairly prejudicial to the shareholders or at least the petition
owner.  If the courts find this is the
case, the result is usually that the majority shareholders are asked to buy out
the minority ones at a price set by the courts. This then frees the minority
shareholders from the company. The second claim is just and equitable winding
up28. As the
name suggests, this involves the winding up of the company and bringing it to
an end. In order to do this however, the petitioner must show that there will
be substantial surplus after the winding up. The courts will award this remedy on
a similar basis to that of the unfair prejudice; unfair conduct. Unlike an
unfair prejudice claim however, there are limited advantages as to when a
winding up would be a preferred remedy. Finally, a claimant can pursue a derivative
claim. This is a statuary remedy under the Companies Act29 and is
made on behalf and for the benefit of the company. The claim must be vested in
company involving either negligence, breach of duty or breach of trust by the
directors. Unlike the other 2 remedies, a court must allow a derivative claim
to pass. This means that as soon as the claim is issued the courts must allow
it to pass.

Regarding the name of the company the group
have chosen, Princess (By Royal Appointment) PLC would not be allowed without
permission. As the company being formed is a public limited company it must
have PLC at the end of its name; s58(19)30, and
although this name has that, it’s the wording within that conflicts with the
Act. Sections 53 and 54 outline what words cannot be used in the name of a
company. Section 53 deals with all words that are offensive and although that doesn’t
apply here, section 54 does. Section 54 of the Companies Act 2006 sets out that
you must seek permission to include any word which may link the company to the Her
Majesty’s Government or any public or local authority. Because the name suggests
this by using ‘By Royal Appointment’, they would have to seek permission from
the secretary of state to name the company this. Before this is done they
cannot use this name for the company.

Looking at finance, the most common way for
a new company to raise capital is through loans or overdrafts from a financial
institution. By using Lizzies property, the group could apply for a mortgage on
that property that would raise them a large amount of capital by using the premises
as security. This would also be known as a debenture. A debenture is a term used
to refer to secured loans such as a mortgage. They are secured so that if the
company defaults from the repayment, the lender can take steps so regain their
money. In this case a title to a property is not enough, instead the money
lender obtains a property right to gain the land which is used as security because
they can enforce this at a later date. In order to obtain this security, a
fixed or floating charge can be used. A fixed charge is applicable to one asset
only for example, Lizzies premises. A floating charge however, is a charge
shifting over assets; Re Cimex Tissues
Ltd (1994)31.
Assets can include cash, stock plant and vehicles, essentially all the company
owns. The difference between the two charges being that because it’s a fixed
charge over one asset, the company can sell that particular asset. A floating
charge however allows the company to sell and purchase new assets as they
please. I would advise that the clients use a floating charge so they can
replace assets as they wish and use the £500,000 premises as security for a
mortgage to gain extra capital.

1 1897 AC 22.

2 2013 UKSC 34.

3 Alastair Hudson, Undertsanding
company law (2nd edn, Routledge 2018) p37.

4 1897 AC 22.

5
1962 1 WLR 832.

6 2013 UKSC 34.

7 2013 UKSC 34, p19, paragraph 34.

8
1897 AC 22.

9
1939 4 All ER 116.

10
1897 AC 22.

11 1962 1 WLR 832.

12
2013 UKSC 34.

13
1897 AC 22.

14
2013 UKSC 34.

15
2013 UKSC 34.

16
1897 AC 22.

17
1897 AC 22.

18 2013 UKSC 34.

19 2013 UKSC 34.

20 2013 UKSC 34.

21 2006.

22 Companies Act 2006, s112.

23 Companies Act 2006, s250.

24 Companies Act 2006, s18(1).

25 Companies Act 2006.

26 s19(3).

27
Companies Act 2006, s994.

28 Insolvency
Act 1986 s125.

29 2006,
s260-264.

30 Companies
Act 2006.

31 1 BCLC 409.

 

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